October 8, 1958

Hon. WilliamM. King State Securities

Commissioner Austin,

Texas

Dear Sir: Opinion No. WW-504

Re: Whetherthe proposed offer of common stock to holdersof surplus debentures

under the facts given is an exempttransaction under the provisions of either 5(R) or 5(B) of The Securities Act.

You have asked the opinionof this office concerning whether a certainoffering of the Citizens

Standard

Life Insurance

Companyof Corpus Christi,

Texas, of common stock to its "advisory board investment certificate

holders"is exempted from the provisions of The Securities Act. Your letter is as follows:

"In May, 1954, Citizens Standard

Life Insurance

Company, CorpusChristi, Texas, authorized

the issuance

at public sale of 3,000ADVISORY BOARD INVNSTlMENT

CERTIFICATES, of the face value of $600.00each. By December31, 1954, subscriptions for 1449 Certificates had been taken on which $238,590.00 in payments

had been made. A time pay-outplan was offeredsubscribers.
"The purposeof this offering was to raise surplus funds for expanding the life insurance

business

of the company,

and all net receipts have been In the past creditedto its unassigned surplus

account. The company's obligation:>

on the Certificates is not recognized

or reported as a statement liability

in the annualreportsto the State Board of Insurance.
"The original

terms are set forth In the attached copy of a Certificate.The original offer of the Certificates

to the publicwas made prior to the effective date of the Insurance Securities

Act; therefore,

the offering was not subject

to registration

with a State agency.
"On September

17, 1957, over signature of the company's,secretary,

and on September

30, 1957, over the signature

of the company's

president,

offersto exchange stock of the companyfor certificates outstanding

wereEon. WilliamM. King, page 2 (WW-504)

made under terms that were different from the terms provided in the certificates. Copies of these two letters are attached. No application for registration

of securities has been filed.

"In your examination of these letters it will be noted that an offer is made by the company to e*chsnge subscription

contracts

for the purchase

of stock for subscription

contracts

for the purchase

of Advieory Board Certificates in addition

to an offer to exchange stock sharesfor paid-upcertificates.
"The Securities

Act sets out in Section7.A.that securities

must be registered thereunder

if sold or offered unless otherwise registered

under Section7.B., or Section7.C., or unless such securities are defined

by Section 5. as exempttransactions or by Section6. as exempt securities.The Securities Act in Section4.A. defines a security

and in Section4.E. defines the term ' sale' or 'offer

for sale'.
"Underthe facts as given above, is the exchsnge offermade in the attachedletterssubject to registration under the Securities Act, unless exemptunder Section 52-7.1
"Section

5.F. of the Securities Act sets out as an exempttransaction

the issuance

of securities

by a company to its securities holders,

or creditors,

when made in good faith in the processof a bona fide reorgsnizatlon. In your opinion would an amendment to a corporation's charterchanging its capitalstock from par value to non par value, and increasing the number of shares, joined with the stockholders ' decision

to exchange

common stock for surplus debentures,

altering

the terms thereof,constitute .s readjustment

of capitalstructure or a serious

overhauling

by legal procedures to bring such change

within the meadng of a bona fide reorganizationas used in Section 5.F.T

"Your consideration of these matters

will be greatly

appreciated."
The Citizens

Stan&d Life Insurance Company issuedapproximately 3,000 of its so-called "advisory

board investment

certificates," each havinga $600 face or maturity value. The certificates were issued either for cash or upon a five-year payment

plan. Under the terms of the certificate,

the company

agreed to pay the certificate holder interest at the rate of 4$ on all payments made under the certificate, withHon. WilliamM. King, page 3 (WW-504)

the first year'spaymentof interest to be made out of contributedsurplus, and thereafter out of earned surplus. It was further provided that at the end of the first full calendar year after the date of the certificate,

8nd the end of each calendar year thereafter

until m8turity, the company

would createan "annualbonua fund" for the benefitof the registered

certificate

holdersout of the profitsand/or earned surplus of the company,

which it would divide into 3,000 equal parts; 81$ so long a8 a certificate was in force, one suchpart would be paid to each owner of the certificate.The amount of the annualbonus fund was to be Z$ of the renewallife insursnce premiums

paid duringthe year to the companyon all life insurance policies,

plus l$ of the "excessinterest earnings

on all investments" of the company. The company was required

to continue

the paymentsinto the annualbonus fund until the maturityof the certificate or until the certificate had been called in the m8nnerprovidedin the contract.

In addition

to the annualbonus fund provided, the company also agreedto set up on its books 8 "special surplusfund account" and agreedto creditto that accountat the end of each calendar year after the date of the certificate a sum equal to 33-l/3$ of its net surplus earnings

for each year. It w8s provided th8t the certificate should mature and the face value thereof paid to the registered ownerwithin 60 days after the amountaccumulated in said "special

surplusfund BCcount" should

be equal to the aggregate of the total face value of all outstanding

advisory

board investment

certificates

and the accumulated interest,

if any.
At suchmaturity

the company

agreedto pay to the registered owner the face value of $600.00'plus interest

and further "within the limits of its presently existing

legal contractual

powers,to permit the owner of this certificate, if he so elects, in lieu of acceptance of paymentof the face value in cash, to convert the face value of this certificate

into the compaay's

common stock at the stipulated price of $100 per.sh8re.w

Under the terms in the certificate under the heading "Guaranteed Surrender

Value,"the certificate holder could discontinue payment and could receive8 “modified certificate"

which in effectwas a pro rata advisory

board certificate, less certainliquidated d8mage charges givingthe certificate holderthe right to participate on a pro rat8 basis in 811 the benefitsexceptthe 8Mual bonus fund.

Under the heading "Miecellaneoun," it was ProVidd that any moneyspaid for the investment certificate

should be treated 8s paidin surplus

and th8t the companycouldmake use of such funds in any way that surplusfunds of the company might be lawfully

used. It was further provided

that all interest

was payableonly 88 therein set forth, and that the investment certificate,

together

with the interest

thereon, shouldnot be a liability of the companyor a claim againstany of its

I.4 .

Eon. William

M. King, page 4 (WW-504)

assets except 8s above specified in the paragraph. And in seemingly conflicting

terms, it was further provided

that in the event of liquidation of the company the investment

certificate

should immediately

mature and become 8 presentliability of the companysubject to the rightsof the policyholder. ~...,".

These certificates have not yet matured. It is the purpose of the Citizens

Standard

Life Insurance

Companyto offer to each holder of an advisory

board investment

certificate

60 sharesof its common stock in exchangefor a surrender of qych certificate plus 8 bonus of 6 shares to each certificate holder c&&l&ing h& payments by a date specified which would be in advanceof the &&es specified in the certificate. It should

be noted that under the terms of the certificate the company hd agreedthat at maturity the face value should be payable in cash or stock of the company at the election

of the certificate

holder. Thus, under the terms of the certificate at maturity,

each certificate

holder of a full $600.00 certificate would have been entitled to elect to receive six shares of stock. Since the issuance of these certificates the corporate

structure

of the Citizens

Standard

Life Insurance

Company has been changed

resulting

in 8 ten-for-one

split..
i Prior to the charter amendment

creating

the stock here in question, the company

had issued stock to other certificate holders

who had paidyinfull the amount of their certificate. The general

plan of the company

has been to Obtain charter amendments

increasing

their capital stockperiodically

to accommodate

these certificate

holders.
The Securities

Act statesthat securities as defined

therein must be registered under Section7 if sold or offeredfor sale unless the sale or offer of sale of such securities constitute

"exempt

transactions"

as defined

by Section 5, or such securities are "exemptsecurities" as &fined by Section6. The term "sale"and related terms are definedin great detail in Section4(E) and it is only necessary to refer to 8 portionof this definition to ascertain

that the contemplated exchsngein this case would constitute a sale or offer to sell of securities requiring

registration

unless exempted. Section4(E) is 8s follows:
"The terms 'sale'

or 'offer

for sale' or 'sell'shall include

every disposition,

or attemptto disposeof a security for 8 value. The term 'sale' means and includes contracts

and agreements

whereby securities are sold, traded or exchanged

for money,property, or other things of value, or anyJtrensfer

or agreement

to transfer,

in trust or otherwise

. , . The sale of 8 security under conditions

which entitle the purchaser

. . . to exchange the same for, or to purchasesome other security, shsllnot be deemed 8 sale or offer fbr sale of such other security; but no exchangefor or sale:

of such other security shall ever be msde unless and ." until the sale thereof shallhave been first authorized in Texas under this act, if not exempthereunder, or by other provisjons

of law.

. .'Hon. William M. King, page 5 (WW-504)

Clearly,

the consummation

of the prospective

plan would fall within this definition.

You have requested in your letter the opinionof this office whether or not the transaction in question

is exempt from registration under the provisions of The Securities

Act. It has been suggested that the transaction

may be exempt eitherunder the provisions of 5(D)(E)(G) exempting

certain

distributions

by a corporation

of securities

directly to its stockholders, or the provisions

of 5(F) relating

to transfers in the courseof reorganization. We shall take up the exemption under 5(D)(E)(G)

first.
Section 5 of The Securities Act is, in part, 88 follows:
"Section

5. ExemptTransactions.
"Except as hereinafter

in this Act specificallyprovided, the provisions of this act shallnot apply to the sale of any security when made in any of the following transactions

and under any of the following conditions, and the company

or person engagedtherein shallnot be deemed s dealer

within the meaning of this act; that is to say, the provisions of this act shallnot apply to any sale, offer for sale, solicitation, subscription, dealing in or delivery of any security

under any of the following

transactions

or conditions:
‘1.

. . "I). The distribution by a corporation

of securities directto its stockholders as a stock dividend or other distribution

paid out of earnings or surplus.
'73. The sale of sn increase of capitalstock of a corporation

only to its stockholders and withoutpayment of any commission

or expenseto any officer, employee, broker or agent;
‘1.

. . “CL The transfer

or exchange

by, or on accountof, one corporation

to anotheror to its stockholders of their or its own securities in connection

with a proposed consolidation or merger of such corporation or in connection

with the changeof par value stock to non par value stock or vice versa, or the exchange of outstsnding shares for a greateror smaller number of shares, provided

that in such case such stockholders do not pay or give or promiseand are not obligated to pay or giveEon. WilliamM. King, Page 6 (WW-504)

any consideration

for the eecu'ritlee

So transferred

or exchanged

other than the securitieri of said corporation then held by them;

. . ."
These exemptions

apply only to "stockholders" of the corporation.
The contention has been advanced

that becauseunder the terms of the so-called

advisory

board investment

certificates,

the holders of the certificates, after completing

the terms of their agreement and sfter maturity,

8re given the right to requirethe company to redeem the certificate

,ia common stock ratherthan in cash, they should be claesifled 88 stockholders. However,

under the facts recited, the certificates in question

have not maturedand there is not at this time under the terms of the contract any existing

right on the part of the certificate holdersto requirethe redemption of these certificates, either in C8Sh or in stock. While it may be true that in some circumstances and under certainconditions perSonSholding

by right of contract or otherwise 8 right to become 8 Stockholder may exercise

under~certain

conditions Some of the right8and prerogatives of 8 Stockholder,

the certificate holdersdo not fall withih the normal definition of the term "stockholdere." We hold that the transaction is not exemptunder Sections 5(D), 5(E) or 5(G).

We next consider

whetherthe tr8neaction in question

qualifies as an exemption

as the issue of Securities in the course of a reorganizationunder the provisions of Section5(E) which is as follows:

"F. The issue in good faith of Securities by a company to its security holders,

or creditors,

in the process of 8 bona fide reorg8nlzation of the company

made in good faith,

. . . provided that

. . . Such Securities are issued in exchangefor securities of such holdersor claimsof such creditors,

or both, and

. . . security holdersor creditors do not p8y or give or promiseand 8re not obligated to pay or give any consideration for Securities

so issuedother than the Securities Of or CtiiQIS

8g8inSt Said company . . . then held or ownedby them."
The term "reorganization" is not definedin the statute. Nor do we find any cases in Texss Interpreting the meaningof this exemption though it has been in effect in substantially the same languagein the Securities

Acts since 1935. Nor have we been able to find any Texas caSes dealing

with the meaningof this term which would have a Significance to its presentapplication.The term "reorganization" has been defined

by Texas Jurisprudence in,Volume

10-B,page 676, as follows:

"A 'reorg8niS8tlon' has been termed 8 plan under which the financial

structure

of the corporation

was rearranged, as by 811

Increase

or decrease

of capital."n

Hon. WilliamM. King, page 7 (WW-504)

This definition

of the term "reorganization" it would includeevery transaction wherebythe capital poration

was increased

or decreased. While it is true "reorganization"

will effecta change in the financial

. I. ^.

is so broad that stock of a corthat almost every structure

of the corporation,

it is not true tnat every cnange *n zne rlnancial structure is 8 "reorganization."

We find thst the above quoted. from Texas Jurisprudence is not supported

by the cases cited therein.

At 15 Fletcher's

Cyclopedia

Corporations,

Section201, page 318 (1938 revised

volume),it is demonstrated that the term "reorganization"

has many meanings.
"The term 'reorganization' signifies

the act or process of organieing

anew. As anpliedto corporations, it denotes

various

proceedings

and transactions

by which a succession

of corporations

is broughtabout. Ordinarily it involves

the creation

of a new corporation to take over the assetsand property and continue

the business

of the old. This, however,is not necessarily the effect of a reorganization.

The terms of the statute and the intention of the Legislature and of the parties

may be merely to continue

the existing

corporation,

withoutdissolution, under the same or different name and with the same or differentpowers,and under the 881116) or a different

management. According

to Mr. Morawetz, the term 'reorganization' is 'commonly

appliedto the formation of a new corporation by the creditors

and shareholders

of a corporation

which is in financial

difficulties,

for the purposeof purchasing the company's

works and other property after the foreclosure of a mortgage

or judicialsale'.

"It is proper to classify reorganizations

as (1) reorganizations

in connection

with the foreclosure of corporate mortgages,

or in connection

with other judicial or execution

sales of the corporate property

by the purchasers at the sale,and (2) other reorganizations or reincorporat ions. The latter class is divisible into (a) reincorporations where the purpose is merely to correctillegalities or defects in the originalincorporation, or to broadenthe scope of the powers of the corporation, including,

in one sense of the word, the amendment as well as the extension or revivalof charters;(b) the scaling of securities

by voluntary

agreements

and (c) the organization, primarily by or on behslf of the stockholders as distinguished

from the creditors,

of 8 new corporation, without8ny forced sale, to take over the propertyof the existing corporation. The term is used most often in connection with the foreclosure .Hon. WilliamM. King, page 8 (UW-504)

of corporate

mortg8geS

where 8 new corporation is formed by the foreclosure purchases,

and most of the law, as laid down in the decision, in connection

with reorganizations, relatesto the first class of reorg8nization, and much of such law is not applicable to other reorganizations.
"The reasons inducing 8 reorganization

are not in every case the same,but for the most part they are to be found in the weak financial or insolvent

condition

of the p8rticul8r

corporation.

And so the aim of a corporatereorganizstion

is generally

to put the company

upon a sound finsncialbasis,

and to enable it to take care of it8 obligations,

therebyavoidingllquld8tlon or bsnkruptcy. But in Some cases 8 reorganization IS effected,

notwithstanding

the corpor8tiOn

IS SolVent. Very often 8 'sound enterprise,

earningan adequate return,

will be hampered by 8n unsound finsnclal Structure

involving

excessive

fixed charges,such 8s bond Interest; or again the difficulty of refunding

8 material

bonded indebtedness during 8 time of financial

stringency,

or the urgentneed of additionalcapital for improvements, or the weight of an unfunded debt will make 8 reorganization ecessary.
"The reorganization of an Insolvent

business involves considerations

not present in the reorganization of a solvent one. Almost alxaysthe 18tter is 8 matter of purely business

policynot intended to nor resulting

in dieturbante of existing

legal rights of creditors or Stockholders. It Is carried

through in strictconformity with Such rights, the purpose

being to better an existing condition. The former is compelled by the ineXOr8ble

logic of 8 bad situation, is designed

to save 8s much 8s possiblefrom impending wreckage,

8IId 8lw8yS inYOlYeS

change8in the existinglegal rights of some, if not all', of those having rights in connection

with the propertyinvolved."

Cur attention

la calledto the case of Utility InvestingCorporationv. Stewart,11 Fed. Supp. 391 by the FederalDistrict Court in Pennsylvania,

which opinion

w8e affirmedIn Stewartv. Utility IIwesting Corporation

(C.C.A. 3rd) 78 Fed.2d 279. Thin case Is apparently the only one interpreting the meaningof the term "reorganization" in the contextof the State Securities Act. The PennSylvania Securities

Act provided

that:
"The issue of securities to the Security

holderaor other creditors of 8 corporation,

in the processof 8 bon8 fide reorganization of such corporation, made In good faith

. . . In exchangefor the securities

. . . of such creditors

. . . [Should not constitute

the perSon or company engagedtherein8 dealer within itS 

### meaning].”Hon. WilliamM. King, page 9 (WW-504)

Under the facts involvedin the case, the corporation in question was offering

to debenture

holdersof that companycertain new or different

securities

in exchange

for their debentures. It was the purpose of the company to relieve itselfof the burden of having to meet fixed interest

charges

at definite

periods

by inviting

the holdersof fixed interest

debentures

to exchange

them for new obligations at a high rate of interest,

cumulative,

but payableonly as earnedand coupled with a sinkingfund provision. The holders were also offeredtwo options, the exercise

of either of which was described by the court as havingthe effectof naturally lightening

the fixed interest

burdenupon the equities of the holdingcompany. The court stated:

"I entertain

no doubt that this rearrangement of its capitalstructure

is a reorganization of the company

within the meaning of the act. While corporate reorganizations are frequently, in fact usually,effective throughthe medium of receivership and judicialsale, the ordinarymeaning of the word is quitebroad enoughto include voluntary capitalreadjustments. Nor is it necessary that there be a new corporation

or changeof management or ownership

of physical

assets. Nor need the equities be affected (though in this case they are). That the act contemplates, among others,reorganizations entirely

confined

to the credit structure

appears from the fact that the provision in question may be read as applicable to 'issue

of securities

to the

. . . creditors

. . . in exchangefor the

. . . claims of such creditors.' 70 P.S. Pa. Sec. 2(c) and (11).
"The underlying

purposeof this and similarstatutes is to protectthe investing public. The methodby which the Pennsylvania

Act does it is the licensing of dealers. Exceptions

from the operation

of the law are created by excludingfrom the class of dealers personsengagedin certain specified

transsctions,

one of which is the offer of securities

in the courseof corporate reorganizations.

The only condition

is that the reorganization be bona fide and the offer of securities made in good faith."
This decision

recognizes

that whethera given transaction is a reorganization

depends

upon the particular facts involved. Though recognizing

certain similarities, we believethe fact situation involved in your requestdiffersfrom those in this decisionso that it would not control

even though it be the law in Texas.

In connection

with this transaction the Citizens

Standard

Life Insurance

Company

has made application to the Commissioner of Insurance for approval

to amend their charter to permit the increase of their capltal in order to transfer the stockto their so-called certificate

holders. We call attention

to certain

testimony

takenby the Commission on FebruaryHon. WilliamM. King, page 10 (WW-504)

25, 1958, in connection with said application. On page 13 of this transcriptMr. PrestonDoughty, President

of the Citizens

Standard

Life Insurance

Company,

explained

the purposeof the amendment in the following language:

"In fact, the programof getting these ~ . . this charter

amendment

was motivated

by constant

requestsfrom the advisory

board, of certificate holders

that they be permitted

to surrender

their certificate

and be issued stock. The stock of the company, on a localmarket,has a very good, high demand."

On this same subject matterMr. Doughty statedon page 14:
"Many of these certificate owners,

having completed their payments,

continuously

requested

of us that they be Issued stock." Again, on page 15 Mr. Doughty stated:
II

. . . We felt, and the holdersof the certificates felt, too, that their position would be improved

if they couldbe permitted

to become stockholders."
The nature of the transaction is furtherdiscussed by Mr. Doughty on page 15 when he was askedwhetherthe certificate holders

were surrendering

their certificates

and taking out stockunder the option called for in the certificate, and Mr. Doughtyreplied that they were not obtaining their certificates under the option

but in addition

to the option, and furtherstated in response to a question

as to whether or not the exchange

was made on the same basis of the option,as follows:
"Altered

only by the fact that the stock--the ten sharesof no par stockhad been authorized and issuedfor each sharepreviously issuedand authorized par stock and givingthem full

. . .I'

He affirmed

that the certificate holders

were getting60 shares of no-par stock in exchangefor the certificate and that the company was givingthe certificate holdersthe opportunity of obtaining

Six additionalshares if they had previously paid in full or would now pay in full the amount of their certificate.

Mr. Doughty furtherstatedon page 1.6that a subsequent offer to the certificate

holders

was made purely on the basis of the certificate holders'

optionscontained

in the certificate. Again, on page 20 Mr. Doughty,in explaining the purposeof the charter

amendment,

stated:Hon. WilliamM. King, page 11 (WW-504)

"In order to be of assistance to them and at the same time the company,

to relievethe company of the burden of payingthem interest and payingthem this participation in the bonus pool, the stockholders, the directors,

and the officers

of the companyfelt that we should do both these things,go to no-par stockand at the same time offer these people the opportunity to become shareholders."

We are of the opinion that under the facts surrounding the issuance

of the stock in question that the transaction does not constitute a reorganization as that term is used in Section5(F) for the reason that the principal purposeof the distribution appearsto be the honoring

of contractual

commitments

made by the company to Its certificate holdersto allow them the privilege of becomingstockholders. None of the ordinary

or usual elements

givingrise to a need for the organization appearsto be predominant.There are no facts to indicate that the transaction

is motivated

by the financial

dietress

of the corporation, nor does it appear that the primary motive is the lessening of the financial

burden of the company becauseof its obligations to the holdersof the certificates. It should heLnoted

that in the ordinary circumstances

one of the primary

purposes

of reorganization

is the protectionof the equity of the present stockholders. That this purpose is not entirely

the purposeof the'present transaction

is evidenced

by the fact that the offer of the company to certificate

holders

who have not paid in full the amount of their certificate is not simplyan offer of stock equal to the present value of their certificate but ratherunder the plan advanced

by the companythe company has offeredthese people the opportunity

to exchange

their advisory

board certificates for subscription

contracts. Clearly, from this point of view the transaction in question

does not constitute a reorganization

under the terms of Section 5(F). The holdersof the advisory board certificates that are not fullypaid are only security holdersor creditor6 of the company

to the extentthat they have paid on their certificate.Particular note must be given of the qualifying clauseto Section5(F) which provides that before the exchangein reorganization may be exempt, it must be a transaction in which the "security holdersor creditors do not pay or give or promiseand are not obligated to pay or give any consideration for the securities

so issuedother than the securities of or claimsagainst said company . . . then held or ownedby them."

The certificate

holder6

who have not fully paid for their certificates

by accepting

subscription

contracts

would be bound to pay further consideration for the stock of the company other than the simple surrender

of the certificate

that they held.

We are of the opinionalso that the transaction in question does not qualify

as an exempt transaction under Section5(F) for the additional

reasonthat some of the stock to be issued is in the form of a bonus for early paymentor prior paymentof the face amount ofHon.. WilliamM. King, page 12 (WW-504)

their certificates.Clearly,such certificate holders

have given consideration

in the form of early oti prior payment

which is in addition to and in excess of the simple surrender of the certificate

which they hold.

In the course of this opinion we have of necessity made certain factualconclusions based on the material which you have furnished this officeand from the materialcollected by the State Board of Insurance in connection

with the charter

amendment

application

of the company. The fact findingauthority under The Securities Act rest6 ,with

you and you are at liberty to arrive at different factualconclusions from those utilizedin this opinion.

Issuance

of stockto holdersof advisory board certificates

under circumstances in questionis not exempt from registration eitherunder the provisions of Section

. 5(D), 5(E), 

### .5(F) Act of 1957.



### FBW:llU APPROVED:

‘OPINION COMMITTEE:
Geo. P. Blackburn,

Chairman
John Reeves MorganNeebitt or 5(G) of The Securities

Yours very truly,

WILL WILSON Attorney-.General

of Texas

-" Fred B. Werkenthin Aaeistant

REVIEWED

FORTKE ATTORNEY

GENERAL BY Riley Eugene FlCtcher